What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-29 compared with 2020-08-05 · 93 added, 89 removed, 201 unchanged (48% of the section changed)

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The statements in this discussion regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements.

These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A “Risk Factors” below, in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("SEC") on February 27, 2020, and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the SEC on May 5, 2020.

Our actual results may differ materially from those contained in or implied by any forward-looking statements.

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In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to impact the United States and other major markets in which we operate across the world, resulting in severe disruptions to global markets and supply chains, significant uncertainty and a weaker global outlook.

The effects of the pandemic on the global economy had a material impact on demand for our products and to our results of operations during the second quarter 2020 as our suppliers and customers reduced or halted production.

The effects of the pandemic on the global economy began having a material adverse impact on demand for our products and on our results of operations during the second quarter 2020 as our suppliers and customers reduced or halted production.

Although the Company’s suppliers and customers have restarted production, production disruptions due to more localized COVID-19 outbreaks as well as the continued uncertainty and weaker global outlook continued to have a material impact on demand for the Company’s products and on the Company’s results of operations during the third quarter 2020.

To limit the spread of COVID-19, governments have taken various actions including travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures.

Despite these ongoing disruptions, we have continued our manufacturing operations throughout 2020 allowing us to deliver our products to customers without interruption.

However, our manufacturing facilities in Hungary, India, and Tennessee suspended operations, for varying lengths of time, and our global manufacturing facilities have cut back on operating levels and shifts as a result of government orders, our inability to obtain component parts from suppliers and/or decreased customer demand.

Despite these disruptions, we have continued our manufacturing operations throughout 2020 allowing us to deliver our products to customers without interruption.

However, our global manufacturing facilities have cut back on operating levels and shifts as a result of government orders, our inability to obtain component parts from suppliers and/or decreased customer demand and in certain locations temporarily suspended operations in the second quarter.

Additional suspensions and cutbacks of our manufacturing operations may occur as the impacts from COVID-19 and related responses continue to develop within our global supply chains and customer base, and additional production slowdowns and shutdowns by our global suppliers and customers may continue and could continue to have a material impact to our financial results.

We are taking a variety of measures to promote the safety and security of our employees and to maintain operations with as minimal impact as possible to our stakeholders, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor

access to facilities.

We are also working to align operations, programs and spending across our entire business with current conditions, including reduced compensation expense through restructuring initiatives of both hourly and salary employees related to voluntary and involuntary separation programs, furloughs of a portion of our workforce, reducing overtime, and assessing the timing and cadence of various capital investments and product development initiatives.

Our Net Sales were materially impacted during the second quarter of 2020 by the ongoing COVID-19 outbreak, and we expect that our Net Sales will continue to be impacted for the third quarter 2020 and likely beyond.

We are taking a variety of measures to promote the safety and security of our employees and to maintain operations with as minimal impact as possible to our stakeholders, including increased frequency of cleaning and disinfecting of facilities, social distancing, occupancy limits, mask wearing requirements, remote working when possible, travel restrictions and limitations on visitor access to facilities.

We are also working to align operations, programs and spending across our entire business with current conditions, including reduced compensation expense through restructuring initiatives of both hourly and salary employees related to voluntary and involuntary separation programs, implemented during the second quarter of 2020, furloughs of a portion of our workforce, reducing overtime, and assessing the timing and cadence of various capital investments and product development initiatives.

Our Net Sales were materially impacted during the third quarter of 2020 by the ongoing COVID-19 outbreak, and we expect that our Net Sales will continue to be impacted for the fourth quarter 2020 and likely beyond.

The extent to which our future operations will continue to be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including continuing efforts by governmental authorities to stall the spread and limit the impact of COVID-19, and the timing of such developments.

Second Quarter Net Sales by End Market (dollars in millions)

Third Quarter Net Sales by End Market (dollars in millions)

North America On-Highway

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Total Net Sales

North America On-Highway end market net sales were down 59% for the second quarter 2020 compared to the second quarter 2019, principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic.

North America Off-Highway end market net sales were down $6 million for the second quarter 2020 compared to the second quarter 2019, principally driven by lower demand for hydraulic fracturing applications.

Defense end market net sales were up 14% for the second quarter 2020 compared to the second quarter 2019, principally driven by Tracked vehicle demand.

Outside North America On-Highway end market net sales were down 43% for the second quarter 2020 compared to the second quarter 2019, principally driven by lower global demand due to the effects of the COVID-19 pandemic.

Outside North America Off-Highway end market net sales were down $21 million for the second quarter 2020 compared to the second quarter 2019, principally driven by lower demand in the energy, mining and construction sectors.

Service Parts, Support Equipment and Other end market net sales were down 39% for the second quarter 2020 compared to the second quarter 2019, principally driven by lower demand for North America service parts and support equipment primarily due to the effects of the COVID-19 pandemic, partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting, Inc.

(“Walker Die Casting”).

North America On-Highway end market net sales were down 24% for the third quarter 2020 compared to the third quarter 2019, principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic.

North America Off-Highway end market net sales were down $5 million for the third quarter 2020 compared to the third quarter 2019, principally driven by lower demand for hydraulic fracturing applications.

Defense end market net sales were up 40% for the third quarter 2020 compared to the third quarter 2019, principally driven by Tracked vehicle demand.

Outside North America On-Highway end market net sales were down 28% for the third quarter 2020 compared to the third quarter 2019, principally driven by lower global demand due to the effects of the COVID-19 pandemic.

Outside North America Off-Highway end market net sales were down $20 million for the third quarter 2020 compared to the third quarter 2019, principally driven by lower demand in the energy, mining and construction sectors.

Service Parts, Support Equipment and Other end market net sales were down 9% for the third quarter 2020 compared to the third quarter 2019, principally driven by lower demand for North America service parts and support equipment, partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting, Inc.

(“Walker Die Casting”) in September 2019.

Key Components of our Results of Operations

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Sales are recorded net of provisions for customer allowances and other rebates.

Engineering services are recorded as net sales in accordance with the terms of the contract.

Engineering services are recorded as net sales in accordance with the terms of the

The associated costs are recorded in cost of sales.

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Our primary components of cost of sales are purchased parts, the overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of transmissions and parts.

For the six months ended June 30, 2020, direct material costs were approximately 64%, overhead costs were approximately 27%, and direct labor costs were approximately 9% of total cost of sales.

For the nine months ended September 30, 2020, direct material costs were approximately 64%, overhead costs were approximately 28%, and direct labor costs were approximately 8% of total cost of sales.

We are subject to changes in our cost of sales caused by movements in underlying commodity prices.

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Three Months Ended

Six months ended

September 30,

Nine Months Ended

September 30,

(unaudited, dollars in millions)

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Interest expense, net

Income tax expense

Depreciation of property, plant and equipment

Income tax expense

Amortization of intangible assets

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Expenses related to long-term debt refinancing (e)

UAW Local 933 retirement incentive (f)

Adjusted EBITDA (Non-GAAP)

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Represents expenses (recorded in Other income, net) related to the refinancing of the prior term loan due 2022 and prior revolving credit facility due 2021 in the first quarter of 2019.

Represents a charge (recorded in Cost of sales) related to a retirement incentive program for certain employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) pursuant to the UAW Local 933 collective bargaining agreement effective through November 2023.

Results of Operations

Comparison of three months ended June 30, 2020 and 2019

The recent outbreak of COVID-19 had a material adverse effect on our results of operations for the second quarter 2020.

We continue to actively monitor the impact of the global pandemic, which we expect to materially adversely impact our business and results of operations for the third quarter 2020 and likely beyond.

Comparison of three months ended September 30, 2020 and 2019

The recent outbreak of COVID-19 had a material adverse effect on our results of operations for the third quarter 2020.

We continue to actively monitor the impact of the global pandemic, which we expect to materially adversely impact our business and results of operations for the fourth quarter 2020 and likely beyond.

See “Trends Impacting our Business” above for additional information on the impact of COVID-19 on our results of operations.

The following table sets forth certain financial information for the three months ended June 30, 2020 and 2019.

The following table sets forth certain financial information for the three months ended September 30, 2020 and 2019.

The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Three Months Ended June 30,

Three Months Ended September 30,

(unaudited, dollars in millions)

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Income tax expense

Net sales for the quarter ended June 30, 2020 were $377 million compared to $737 million for the quarter ended June 30, 2019, a decrease of 49%.

The decrease was principally driven by a $234 million, or 59%, decrease in net sales in the North America On-Highway end market principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic, a $58 million, or 39%, decrease in net sales in the Service Parts, Support Equipment and Other end market principally driven by lower demand for North America service parts and support equipment primarily due to the effects of the COVID-19 pandemic partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting, a $46 million, or 43%, decrease in net sales in the Outside North America On-Highway end market principally driven by lower demand due to the effects of the COVID-19 pandemic, a $21 million, or 53%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy, mining and construction sectors and a $6 million, or 67%, decrease in net sales in the North America Off-Highway end market principally driven by lower demand for hydraulic fracturing applications, partially offset by a $5 million, or 14%, increase in net sales in the Defense end market principally driven by Tracked vehicle demand.

Net sales for the quarter ended September 30, 2020 were $532 million compared to $669 million for the quarter ended September 30, 2019, a decrease of 20%.

The decrease was principally driven by an $88 million, or 24%, decrease in net sales in the North America On-Highway end market principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic, a $28 million, or 28%, decrease in net sales in the Outside North America On-Highway end market principally driven by lower global demand due to the effects of the COVID-19 pandemic, a $20 million, or 83%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy, mining and construction sectors, a $12 million, or 9%, decrease in net sales in the Service Parts, Support Equipment and Other end market principally driven by lower demand for North America service parts and support equipment partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting in September 2019 and a $5 million, or 83%, decrease in net sales in the North America Off-Highway end market principally driven by lower demand for hydraulic fracturing applications, partially offset by a $16 million, or 40%, increase in net sales in the Defense end market principally driven by Tracked vehicle demand.

Cost of sales

Cost of sales for the quarter ended June 30, 2020 was $212 million compared to $348 million for the quarter ended June 30, 2019, a decrease of 39%.

The decrease was principally driven by decreased direct material and manufacturing expense commensurate with decreased net sales, lower incentive compensation expense and favorable material costs, partially offset by restructuring charges.

Gross profit for the quarter ended June 30, 2020 was $165 million compared to $389 million for the quarter ended June 30, 2019, a decrease of 58%.

The decrease was principally driven by $247 million related to decreased net sales and $5 million of restructuring charges, partially offset by lower manufacturing expense commensurate with decreased net sales, $8 million of lower incentive compensation expense, $3 million of price increases on certain products and $2 million of favorable material costs.

Gross profit as a percent of net sales for the three months ended June 30, 2020 decreased 900 basis points compared to the same period in 2019 principally driven by lower net sales and restructuring charges, partially offset by lower incentive compensation expense, price increases on certain products and favorable material costs.

Cost of sales for the quarter ended September 30, 2020 was $278 million compared to $321 million for the quarter ended September 30, 2019, a decrease of 13%.

The decrease was principally driven by decreased direct material and manufacturing expense commensurate with decreased net sales and lower incentive compensation expense, partially offset by increased depreciation expense.

Gross profit for the quarter ended September 30, 2020 was $254 million compared to $348 million for the quarter ended September 30, 2019, a decrease of 27%.

The decrease was principally driven by $111 million related to decreased net sales, partially offset by lower manufacturing expense commensurate with decreased net sales, $7 million of price increases on certain products and $5 million of lower incentive compensation expense.

Gross profit as a percent of net sales for the three months ended September 30, 2020 decreased 430 basis points compared to the same period in 2019 principally driven by lower net sales, partially offset by price increases on certain products and lower incentive compensation expense.

Selling, general and administrative

Selling, general and administrative expenses for the quarter ended June 30, 2020 were $69 million compared to $93 million for the quarter ended June 30, 2019, a decrease of 26%.

The decrease was principally driven by $11 million of lower commercial activities spending, $10 million of lower incentive compensation expense, $8 million of lower intangible amortization expense and $3 million of lower stock compensation expense, partially offset by product warranty adjustments and $3 million of restructuring charges.

Selling, general and administrative expenses for the quarter ended September 30, 2020 were $93 million compared to $85 million for the quarter ended September 30, 2019, an increase of 9%.

The increase was principally driven by $23 million of unfavorable product warranty adjustments to address a transmission performance issue associated with shift quality in a defined population of products and $4 million of higher stock compensation expense, partially offset by $11 million of lower intangible amortization expense, $7 million of lower commercial activities spending and $7 million of lower incentive compensation expense.

Engineering — research and development

Engineering expenses for the quarter ended June 30, 2020 were $38 million compared to $37 million for the quarter ended June 30, 2019, an increase of 3%.

The increase was principally driven by $4 million of restructuring charges, partially offset by $3 million of lower incentive compensation expense.

Engineering expenses for the quarter ended September 30, 2020 were $33 million compared to $39 million for the quarter ended September 30, 2019, a decrease of 15%.

The decrease was principally driven by intra-year timing of product initiatives spending and $2 million of lower incentive compensation expense.

Interest expense, net

Interest expense, net for each of the quarters ended June 30, 2020 and June 30, 2019 was $33 million.

Interest expense, net was principally driven by approximately $4 million of lower interest expense on ATI’s New Term Loan due to lower variable interest rates, offset by $2 million of increased interest expense on interest rate hedges that became effective in the third quarter of 2019 and $2 million of interest expense on ATI’s new revolving credit facility with commitments in the amount of $600 million due September 2024 (“New Revolving Credit Facility”).

Interest expense, net for the quarter ended September 30, 2020 was $34 million compared to $32 million for the quarter ended September 30, 2019, an increase of 6%.

The increase was principally driven by $4 million of increased interest expense on interest rate hedges that became effective in the third quarter of 2019 and $1 million of interest expense on ATI’s new revolving credit facility with commitments in the amount of $600 million due September 2024 (“New Revolving Credit Facility”), partially offset by approximately $4 million of lower interest expense on ATI’s New Term Loan due to lower variable interest rates.

Other income, net

Other income, net for the quarter ended June 30, 2020 was $5 million compared to $3 million for the quarter ended June 30, 2019.

Other income, net for the quarter ended September 30, 2020 was $4 million compared to $2 million for the quarter ended September 30, 2019.

The change was principally driven by $1 million of favorable change associated with assets held in a rabbi trust.

Income tax expense

Income tax expense for the three months ended June 30, 2020 was $7 million, resulting in an effective tax rate of 23%, compared to $48 million of income tax expense and an effective tax rate of 21% for the three months ended June 30, 2019.

Income tax expense for the three months ended September 30, 2020 was $21 million, resulting in an effective tax rate of 21%, compared to $45 million of income tax expense and an effective tax rate of 23% for the three months ended September 30, 2019.

The decrease in income tax expense was principally driven by decreased taxable income.

The change in the effective tax rate was principally driven by decreased estimated U.S.

The decrease in the effective tax rate was principally driven by increased estimated U.S.

federal income tax deductions.

Comparison of six months ended June 30, 2020 and 2019

The recent outbreak of COVID-19 had a material adverse effect on our results of operations for the six months ended June 30, 2020.

We continue to actively monitor the impact of the global pandemic, which we expect to materially adversely impact our business and results of operations for the third quarter 2020 and likely beyond.

Comparison of nine months ended September 30, 2020 and 2019

The recent outbreak of COVID-19 had a material adverse effect on our results of operations for the nine months ended September 30, 2020.

We continue to actively monitor the impact of the global pandemic, which we expect to materially adversely impact our business and results of operations for the fourth quarter 2020 and likely beyond.

See “Trends Impacting our Business” above for additional information on the impact of COVID-19 on our results of operations.

The following table sets forth certain financial information for the six months ended June 30, 2020 and 2019.

The following table sets forth certain financial information for the nine months ended September 30, 2020 and 2019.

Six Months Ended June 30,

Nine Months Ended September 30,

(unaudited, dollars in millions)

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Income tax expense

Net sales for the six months ended June 30, 2020 were $1,014 million compared to $1,412 million for the six months ended June 30, 2019, a decrease of 28%.

The decrease was principally driven by a $259 million, or 33%, decrease in net sales in the North America On-Highway end market principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic, a $68 million, or 34%, decrease in net sales in the Outside North America On-Highway end market principally driven by lower demand due to the effects of the COVID-19 pandemic, a $51 million, or 18%, decrease in net sales in the Service Parts, Support Equipment and Other end market principally driven by lower demand due to the effect of the COVID-19 pandemic and lower demand for off-highway service parts partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting, a $21 million, or 31%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy, mining and construction sectors and a $12 million, or 52%, decrease in net sales in the North America Off-Highway end market principally driven by lower demand for hydraulic fracturing applications, partially offset by a $13 million, or 19%, increase in net sales in the Defense end market principally driven by Tracked vehicle demand.

Net sales for the nine months ended September 30, 2020 were $1,546 million compared to $2,081 million for the nine months ended September 30, 2019, a decrease of 26%.

The decrease was principally driven by a $347 million, or 30%, decrease in net sales in the North America On-Highway end market principally driven by lower demand for Rugged Duty Series and Highway Series models primarily due to the effects of the COVID-19 pandemic, a $96 million, or 32%, decrease in net sales in the Outside North America On-Highway end market principally driven by lower global demand due to the effects of the COVID-19 pandemic, a $63 million, or 15%, decrease in net sales in the Service Parts, Support Equipment and Other end market principally driven by lower demand for North America service parts and support equipment primarily due to the effects of the COVID-19 pandemic partially offset by aluminum die cast component volume associated with the acquisition of Walker Die Casting, a $41 million, or 45%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy, mining and construction sectors and a $17 million, or 59%, decrease in net sales in the North America Off-Highway end market principally driven by lower demand for hydraulic fracturing applications, partially offset by a $29 million, or 27%, increase in net sales in the Defense end market principally driven by Tracked vehicle demand.

Cost of sales

Cost of sales for the six months ended June 30, 2020 was $523 million compared to $664 million for the six months ended June 30, 2019, a decrease of 21%.

The decrease was principally driven by decreased direct material and manufacturing expenses commensurate with decreased net sales, lower incentive compensation expense and favorable material costs, partially offset by restructuring charges.

Gross profit for the six months ended June 30, 2020 was $491 million compared to $748 million for the six months ended June 30, 2019, a decrease of 34%.

The decrease was principally driven by $285 million related to decreased net sales and $5 million of restructuring charges, partially offset by $12 million of lower incentive compensation expense, lower manufacturing expense commensurate with decreased net sales and $8 million of favorable material costs.

Gross profit as a percent of net sales for the six months ended June 30, 2020 decreased 460 basis points compared to the same period in 2019 principally driven by lower net sales and restructuring charges, partially offset by lower incentive compensation expense, favorable material costs and price increases on certain products.

Cost of sales for the nine months ended September 30, 2020 was $801 million compared to $985 million for the nine months ended September 30, 2019, a decrease of 19%.

Gross profit for the nine months ended September 30, 2020 was $745 million compared to $1,096 million for the nine months ended September 30, 2019, a decrease of 32%.

The decrease was principally driven by $396 million related to decreased net sales, $8 million of increased depreciation expense and $5 million of restructuring charges, partially offset by lower manufacturing expense commensurate with decreased net sales, $17 million of lower incentive compensation expense, $9 million of favorable material costs and $9 million of price increases on certain products.

Gross profit as a percent of net sales for the nine months ended September 30, 2020 decreased 450 basis points compared to the same period in 2019 principally driven by lower net sales, increased depreciation expense and restructuring charges, partially offset by lower incentive compensation expense, favorable material costs and price increases on certain products.

Selling, general and administrative

Selling, general and administrative expenses for the six months ended June 30, 2020 were $144 million compared to $177 million for the six months ended June 30, 2019, a decrease of 19%.

The decrease was principally driven by $18 million of lower incentive compensation expense, $14 million of lower intangible amortization expense, decreased commercial activities spending and $3 million of lower stock compensation expense, partially offset by product warranty adjustments and $3 million of restructuring charges.

Selling, general and administrative expenses for the nine months ended September 30, 2020 were $237 million compared to $262 million for the nine months ended September 30, 2019, a decrease of 10%.

The decrease was principally driven by $25 million of lower intangible amortization expense, $24 million of lower incentive compensation expense and decreased commercial activities spending, partially offset by unfavorable product warranty adjustments, including a $23 million adjustment in the third quarter of 2020 to address a transmission performance issue associated with shift quality in a defined population of products and $3 million of restructuring charges.

Engineering — research and development

Engineering expenses for the six months ended June 30, 2020 were $74 million compared to $68 million for the six months ended June 30, 2019, an increase of 9%.

The increase was principally driven by the timing of product initiatives spending and $4 million of restructuring charges, partially offset by $6 million of lower incentive compensation expense.

Engineering expenses for the nine months ended September 30, 2020 and 2019 were both $107 million.

Engineering expense was principally driven by $4 million of restructuring charges and the intra-year timing of product initiatives spending, offset by $8 million of lower incentive compensation expense.

Interest expense, net

Interest expense, net for the six months ended June 30, 2020 was $66 million compared to $69 million for the six months ended June 30, 2019, a decrease of 4%.

The decrease was principally driven by approximately $6 million of lower interest expense on ATI’s New Term Loan due to lower variable interest rates and $5 million of expenses related to the long-term debt refinancing in 2019 that did not recur in 2020, partially offset by $4 million of increased interest expense on interest rate hedges that became effective in the third quarter of 2019 and $2 million of interest expense on ATI’s New Revolving Credit Facility.

Interest expense, net for the nine months ended September 30, 2020 was $100 million compared to $101 million for the nine months ended September 30, 2019, a decrease of 1%.

The decrease was principally driven by approximately $10 million of lower interest expense on ATI’s New Term Loan due to lower variable interest rates and $5 million of expenses related to the long-term debt refinancing in 2019 that did not recur in 2020, partially offset by $7 million of increased interest expense on interest rate hedges that became effective in the third quarter of 2019, $3 million of interest expense on ATI’s New Revolving Credit Facility and increased interest expense due to higher interest rates related to long-term debt refinancing in the first quarter of 2019 that extended maturities at fixed interest rates.

Other income, net

Other income, net for the six months ended June 30, 2020 was $4 million compared to $6 million for the six months ended June 30, 2019.

The change was principally driven by $3 million of unfavorable foreign exchange rate changes on intercompany financing.

Other income, net was $8 million for each of the nine months ended September 30, 2020 and September 30, 2019.

Income tax expense

Income tax expense for the six months ended June 30, 2020 was $49 million, resulting in an effective tax rate of 23%, compared to $92 million of income tax expense and an effective tax rate of 21% for the six months ended June 30, 2019.

Income tax expense for the nine months ended September 30, 2020 was $70 million, resulting in an effective tax rate of 23%, compared to $137 million of income tax expense and an effective tax rate of 22% for the nine months ended September 30, 2019.

The decrease in income tax expense was principally driven by decreased taxable income.

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Our ability to generate cash in the future and our future uses of cash are subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control, including the impact to our cash flow that has been experienced due to lower net sales, and is expected to continue to be experienced, related to COVID-19.

We had total available cash and cash equivalents of $434 million and $192 million as of June 30, 2020 and December 31, 2019, respectively.

Of the available cash and cash equivalents, $189 million and $122 million were deposited in operating accounts as of June 30, 2020 and December 31, 2019, respectively, while $245 million and $70 million were invested in U.S.

government backed securities as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020, the total of cash and cash equivalents held by foreign subsidiaries was $64 million, the majority of which was located in China and Europe.

We had total available cash and cash equivalents of $251 million and $192 million as of September 30, 2020 and December 31, 2019, respectively.

Of the available cash and cash equivalents, $151 million and $122 million were deposited in operating accounts as of September 30, 2020 and December 31, 2019, respectively, while $100 million and $70 million were invested in U.S.

government backed securities as of September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, the total of cash and cash equivalents held by foreign subsidiaries was $70 million, the majority of which was located in China and Europe.

We manage our worldwide cash requirements considering available funds among the subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed.

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Our liquidity requirements are significant, primarily due to our debt service requirements.

As of June 30, 2020, we had $641 million of indebtedness associated with ATI’s New Term Loan, $275 million of indebtedness associated with ATI’s New Revolving Credit Facility, $1,000 million of indebtedness associated with ATI’s 5.0% Senior Notes due September 2024 (“5.0% Senior Notes”), $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”) and $500 million of indebtedness associated with ATI’s 5.875% Senior Notes due June 2029 (“5.875% Senior Notes” and, together with the 5.0% Senior Notes and 4.75% Senior Notes, the “Senior Notes”).

As of September 30, 2020, we had $640 million of indebtedness associated with ATI’s New Term Loan, $1,000 million of indebtedness associated with ATI’s 5.0% Senior Notes due September 2024 (“5.0% Senior Notes”), $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”) and $500 million of indebtedness associated with ATI’s 5.875% Senior Notes due June 2029 (“5.875% Senior Notes” and, together with the 5.0% Senior Notes and 4.75% Senior Notes, the “Senior Notes”).

The minimum required quarterly principal payment on ATI’s New Term Loan through its maturity date of March 2026 is $2 million.

We made $3 million and zero principal payments on the New Senior Secured Credit Facility during the six months ended June 30, 2020 and 2019, respectively.

We made $5 million and $92 million of principal payments on the New Senior Secured Credit Facility during the nine months ended September 30, 2020 and 2019, respectively.

There are no required quarterly principal payments on ATI’s Senior Notes.

The New Senior Secured Credit Facility provides for a $600 million New Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letter of credit commitments.

Throughout the six months ended June 30, 2020 , we made periodic withdrawals and payments on the New Revolving Credit Facility as part of our debt and cash management plans.

The maximum amount outstanding at any time during the six months ended June 30, 2020 was $ 5 00 million .

As of June 30, 2020 , we had $ 319 million available under the New Revolving Credit Facility, net of $27 5 million of revolving loans outstanding and $6 million in letters of credit.

Throughout the nine months ended September 30, 2020 , we made periodic withdrawals and payments on the New Revolving Credit Facility as part of our debt and cash management plans.

The maximum amount outstanding under the New Revolving Credit Facility at any time during the nine months ended September 30, 2020 was $ 5 00 million.

As of September 30, 2020 , we had $ 595 million available under the New Revolving Credit Facility, net of $ 5 million in letters of credit.

If we have commitments outstanding on the New Revolving Credit Facility at the end of a fiscal quarter, the New Senior Secured Credit Facility requires us to maintain a specified maximum first lien net leverage ratio of 5.50x.

Additionally, within the terms of the New Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the New Senior Secured Credit Facility for the applicable year.

As of June 30, 2020 , our first lien net leverage ratio was 0.

As of September 30, 2020 , our first lien net leverage ratio was 0.

The New Senior Secured Credit Facility also provides certain financial incentives based on our first lien net leverage ratio.

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The indentures governing the Senior Notes contain negative covenants restricting or limiting our ability to, among other things, incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase our capital stock, make certain investments, permit payment or dividend restrictions on certain of our subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of our assets.

As of June 30, 2020, we are in compliance with all covenants under the New Senior Secured Credit Facility and indentures governing the Senior Notes.

As of September 30, 2020, we are in compliance with all covenants under the New Senior Secured Credit Facility and indentures governing the Senior Notes.

Our credit ratings are reviewed by Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).

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On November 8, 2017, July 30, 2018 and May 9, 2019, our Board of Directors increased the authorization by $500 million, $500 million and $1,000 million, respectively, bringing the total amount authorized under the Repurchase Program to $3,000 million.

We did not repurchase any shares of our common stock under the Repurchase Program during the three months ended June 30, 2020.

During the six months ended June 30, 2020, we repurchased approximately $180 million of our common stock under the Repurchase Program.

All of the repurchase transactions during the six months ended June 30, 2020 were settled in cash during the same period.

As of June 30, 2020, we had approximately $872 million available under the Repurchase Program.

The following table shows our sources and uses of funds for the six months ended June 30, 2020 and 2019 (in millions):

Six Months Ended

We repurchased $16 million of our common stock under the Repurchase Program during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, we repurchased $196 million of our common stock under the Repurchase Program.

All of the repurchase transactions during the nine months ended September 30, 2020 were settled in cash during the same period.

As of September 30, 2020, we had $856 million available under the Repurchase Program.

The following table shows our sources and uses of funds for the nine months ended September 30, 2020 and 2019 (in millions):

Nine Months Ended

September 30,

Statements of Cash Flows Data

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Cash flows used for investing activities

Cash flows provided by (used for) financing activities

Cash flows used for financing activities

Generally, cash provided by operating activities has been adequate to fund our operations.

While we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our operations, customers and suppliers, the negative financial impact to our cash provided by operating activities has been and likely will continue to be material.

We are actively managing the business to maintain cash flow, and we have significant liquidity, including $434 million of cash and cash equivalents and $319 million available under the New Revolving Credit Facility as of June 30, 2020.

We have significant liquidity, including $251 million of cash and cash equivalents and $595 million available under the New Revolving Credit Facility as of September 30, 2020.

At this time, we believe these actions along with cash provided by operating activities, cash and cash equivalents and borrowing capacity under the New Senior Secured Credit Facility will be sufficient to meet our cash requirements for the next twelve months.

Cash provided by operating activities

Operating activities for the six months ended June 30, 2020 generated $240 million of cash compared to $433 million for the six months ended June 30, 2019.

The decrease was principally driven by lower gross profit, higher cash interest expense and cash restructuring charges, partially offset by lower cash income taxes and lower operating working capital requirements.

Operating activities for the nine months ended September 30, 2020 generated $398 million of cash compared to $645 million for the nine months ended September 30, 2019.

The decrease was principally driven by lower gross profit and higher cash interest expense, partially offset by lower cash income taxes and lower operating working capital requirements.

Cash used for investing activities

Investing activities for the six months ended June 30, 2020 used $45 million of cash compared to $177 million for the six months ended June 30, 2019.

The decrease was principally driven by $133 million of business acquisition spending in 2019 that did not recur in 2020 and a $4 million 2020 net working capital settlement related to the acquisition of Walker Die Casting, partially offset by a $5 million increase in capital expenditures principally driven by increased spending related to investments in productivity and replacement programs and engineering and testing capabilities.

Investing activities for the nine months ended September 30, 2020 used $76 million of cash compared to $323 million for the nine months ended September 30, 2019.

The decrease was principally driven by $232 million of business acquisition spending in 2019 that did not recur in 2020, an $11 million decrease in capital expenditures and a $4 million 2020 net working capital settlement related to the acquisition of Walker Die Casting.

Cash used for financing activities

Financing activities for the six months ended June 30, 2020 provided $49 million of cash compared to using $334 million for the six months ended June 30, 2019.

The change was principally driven by $275 million of net borrowings on the revolving credit facility in 2020 compared to none for the first six months of 2019 and $105 million of decreased stock repurchases.

Financing activities for the nine months ended September 30, 2020 used $263 million of cash compared to $399 million for the nine months ended September 30, 2019.

The decrease was principally driven by $135 million of decreased stock repurchases.

Contingencies

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Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur.

Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the three and six months ended June 30, 2020.

Off-Balance Sheet Arrangements

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and our intention to pay dividends and repurchase shares of our common stock.

Important factors that could cause actual results to differ materially from our expectations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 201 9 as filed with the SEC on February 2 7 , 20 20 , Part II, Item 1A of our Quarterly Re p ort on Form 10-Q for the quarter ended March 31, 2020 as filed with the SEC on May 5, 2020 and Part II, Item 1A of this Quarterly Report on Form 10-Q .

Important factors that could cause actual results to differ materially from our expectations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on February 27, 2020, Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2020 as filed with the SEC on May 5, 2020 and for the quarter ended June 30, 2020 as filed with the SEC on August 5, 2020 and Part II, Item 1A of this Quarterly Report on Form 10-Q.

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our public communications.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis